High Gas Prices Push Up Inflation in August, While Pressure Eases Slowly on Other Goods and Services

The Fed is widely expected to skip an interest rate hike at its meeting next week. Wednesday’s figures, though, keep the prospect of another rate increase later this year on the table.

AP/David Zalubowski
A Costco at Sheridan, Colorado, on August 23, 2023. AP/David Zalubowski

WASHINGTON — Inflation jumped last month largely because of a spike in gas prices, but other costs rose more slowly, suggesting price pressures are easing at a gradual pace.

In a set of conflicting data released Wednesday, the Labor Department said the consumer price index rose 3.7 percent in August from a year ago, up from a 3.2 percent annual pace in July.

Yet excluding the volatile food and energy categories, so-called core prices rose 4.3 percent, a step back from 4.7 percent in July and the smallest increase in nearly two years. That is still far from the Federal Reserve’s 2 percent target.

The big rise in gas prices accounted for more than half of the monthly inflation increase, the government said.

Despite the seemingly divergent figures, the decline in the core measure points to inflation coming under control, but at a much more gradual pace than earlier this year. The Federal Reserve closely tracks core prices because they are seen as a better indicator of future inflation trends.

The Fed is widely expected to skip an interest rate hike at its meeting next week. Wednesday’s figures keep the prospect of another rate increase later this year on the table, however, perhaps at its November or December meetings, economists said, because core prices ticked up a bit faster in August than in July.

Wednesday’s report suggested that after inflation faded quickly over the spring and the summer, future declines will be much more gradual. Inflation dropped to 3 percent in June, down from a 9.1 percent peak in June 2022. Some of the forces that pulled down prices earlier this year — such as lower gas prices and improving supply chains, which reduced the cost of goods like furniture — have largely played out, economists say.

“We’re getting to the stage where we’ve basically had all the low hanging fruit in terms of disinflation,” said an economist at T. Rowe Price, Blerina Uruci. “The progress on core inflation over the coming months is going to be slow and it’s going to be uneven.”

A motorist fills up the tank of a vehicle at a Shell station at Englewood, Colorado, on July 5, 2023.
A motorist fills up the tank of a vehicle at a Shell station at Englewood, Colorado, on July 5, 2023. AP/David Zalubowski

On a monthly basis, consumer prices jumped 0.6 percent in August, the biggest increase in more than a year. Gas prices spiked nearly 11 percent, though they have since leveled off: According to the American Automobile Association, the average nationwide price at the pump was $3.85 on Wednesday, unchanged from a month ago.

Excluding food and energy, core prices increased just 0.3 percent in August from July, though that is up from 0.2 percent in the two previous months.

Energy costs rose 5.6 percent just in August, the biggest monthly increase since June 2022. Auto insurance prices also soared, rising 2.4 percent last month and 19.1 percent compared with a year ago. The sharp increase in new car prices in the past two years has also made them more expensive to insure and repair.

Airfares soared 4.9 percent in August from July, though after two months of sharp declines. At the same time, used car costs dropped 1.2 percent, the third straight decrease, while hotel prices fell 3 percent, also the third consecutive fall.

Grocery prices moved up 0.2 percent, a trend that has strained many household’s finances. Yet food cost increases are cooling: They rose 3 percent compared with a year ago, down from double-digit increases last year.

Price increases are slowing, as any American can attest, food, rent, automobiles, and appliances all cost considerably more than they did two years ago.

While filling up her car with gas Tuesday night at Falls Church, Virginia, a local patron, Francesca, said she still notices how much higher her grocery bill has gotten.

“We’re not buying crazy things, like caviar, just the basics,” she said, referring to her weekly food shopping. “And it’s like $150,” compared to a tab of closer to $100 before the pandemic.

Still, Federal Reserve officials are becoming more open to the idea that inflation is coming under control, though chairman Jerome Powell warned last month it was still “too high.”

In his high-profile speech at Jackson Hole, Wyoming, Mr. Powell said the Fed would proceed “carefully” with any further rate hikes, which many economists saw as an opening for the Fed to skip a rate increase at its September 19-20 meeting. When the Fed increases its key rate, it typically raises the cost of mortgages, auto loans, and business borrowing.

The Fed has lifted its benchmark interest rate 11 times in the past 12 meetings to about 5.4 percent, the highest level in 22 years. It increased the rate by a quarter-point in July after leaving it unchanged in June.

The president of the Federal Reserve’s Dallas branch, Lorie Logan, said last week that “another skip could be appropriate” at its next meeting September 19 and 20, “but skipping does not imply stopping.”

Wall Street traders see only a 3 percent chance of a rate hike next week, according to CME’s FedWatch. Yet they have priced in a 40 percent chance for an increase at the Fed’s subsequent meeting in November.

Wednesday’s report shows prices are sticky enough “to have another rate hike this year,” the chief U.S. economist at SGH Macro, Tim Duy, said. 

Mr. Duy said that the economy is expanding at a healthy pace, confounding long-standing fears that a recession is imminent. Americans boosted their spending at restaurants and retailers in July, and hiring has remained solid.

Yet Mr. Duy added that one risk posed by the steady growth is that it could keep inflation pressures high. Companies are boosting pay to find and keep employees, which is great for staff but can lead businesses to raise prices to offset the higher labor costs.

Strikes and labor disputes this year could lead to more healthy pay gains. The Teamsters won robust wage increases in recent negotiations with UPS, while American Airline pilots also secured higher pay in a new contract. The United Auto Workers is also seeking higher pay from the three major American automakers.

The push for higher pay, however, comes after incomes for most Americans trailed inflation for much of the past two years. A report from the Census Bureau Tuesday showed that the inflation-adjusted income for a typical household dropped 2.3 percent last year. Economists expect jobholders to keep pushing to make up for lost ground.

Associated Press

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